The South African Reserve Bank's (SARB) Official Gold and Foreign Exchange Reserves Management Investment Policy (Investment Policy) provides a strategic framework that guides the Financial Markets Department (FMD) and the Reserves Management Committee (Resmanco) in their respective roles in the reserves management process. The Investment Policy specifies, among other things, the aggregate tolerance parameters of the SARB and the eligible asset classes, which are implemented through the Strategic Asset Allocation (SAA).
The SAA determines the optimal asset allocation, while recognising the risk tolerance and liquidity constraints of the SARB. It sets the tranche sizes, currency composition, appropriate asset classes and calculates the expected risk and return over the relevant time horizon. These parameters are specified at tranche level. Hence, each tranche has its own asset mix aimed at achieving the investment objectives of the tranche. The investment objectives in order of priority are:
Safety of the principal amount invested is the foremost investment objective. Investments shall be undertaken in a manner that seeks to preserve the capital value of the overall portfolio over the investment horizon, subject to the approved risk tolerances;
Investment management shall seek to ensure that adequate reserves are available to meet a defined range of objectives. In order to maintain sufficient liquidity, reserves shall be invested largely in securities with an active secondary market; and
Subject to the capital preservation and liquidity constraints stated above, the reserves shall be invested with the objective of achieving a reasonable return which is consistent with the investment objectives and risk constraints.
Each of these objectives has specific liquidity requirements and investment horizons. Consequently the reserves are segregated operationally into sub-portfolios, known as tranches, for investment management purposes.
The reserves are divided into two tranches, namely the Liquidity Tranche and the Investment Tranche. The Liquidity Tranche size is determined by the adequate level of reserves. Amounts in excess of this are allocated to the Investment Tranche.
The Liquidity Tranche is invested in highly liquid securities to ensure the timely availability and capital preservation of reserves.
It is subdivided into four sub-tranches, namely the Special Drawing Rights (SDR) Sub-tranche; the Gold Sub-tranche; the Working Capital Sub-tranche and the Buffer Sub-tranche.
The SDR Sub-tranche focuses on the special needs of the SARB in respect of South Africa's membership of the International Monetary Fund (IMF). SDRs can also be exchanged for currencies of the IMF member countries during crisis events and, as such, are viewed as insurance against unforeseen events.
The Gold Sub-tranche is a function of South Africa's willingness to hold gold as a special reserve instrument. Given gold's high liquidity, its diversification benefits and its role as a form of currency, it is used as insurance against adverse economic outcomes.
The Working Capital Sub-tranche provides liquidity for short-term liabilities and cash management needs.
The Buffer Sub-tranche caters for unforeseen liquidity needs and serves to replenish the Working Capital Sub-tranche as and when required.
The Investment Tranche aims to enhance the returns on the reserves portfolio and to cover longer-term contingencies consistent with South Africa's overall macroeconomic and financial stability policies. It is invested in higher yielding securities to enhance the return of the portfolio, while recognising the capital preservation and liquidity objectives.